Reform brings reduced demand, increased competition and buyer desperation, creating innovation

by Joseph Dudas and Susan Widhalm

Notable changes will take place over the next 5-10 years in healthcare. Reform and economics surrounding the future of reimbursement will force hospitals to dramatically reduce operational costs.

While it will vary for each hospital system most agree that reductions in the order of 10 percent to 30 percent will be necessary. Most experts also believe that they will need to operate within the Medicare reimbursement program as private payers are sure to align with the government, ending an era of subsidy.

The following table depicts what many believe the future of healthcare to be:

Supply chain impact

Supplies represent the second-largest expense in a typical hospital, the first being labor. We all know that labor reductions in a service business are not going to be easy. This will force pressure on supply expense reductions long before any hard decisions are made pertaining to staff. It is our prediction that these factors will cause a change. More specifically as it relates to supplies, our market will quickly transition from a "seller market" to a "buyer market."

The text book definition of a "seller market" is one where there are more buyers than there are sellers. Higher prices result from this excess of demand over supply. When this is true, more sellers will enter the market until the market reaches equilibrium or transition to a "buyer market."

In healthcare two factors contribute to our current "seller market." First, the current reimbursement processes allow for cost-plus payments as it applies to supplies. Second, and more importantly, lack of category management capability allows suppliers to make buyers believe their products are unique. This limits competition and creates scenarios where buyers are led to believe they have no options other than to pay premiums/prices.

Reform will force rapid change. Reduced demand, increased competition, as well as buyer desperation are all likely. The positive is that with desperation comes innovation. Whether we call it "category management" or some other form, buyers will be able to call the shots, but only if they are aware and prepared to take advantage of the change.

Following are the differences for which you will need to prepare:

What Mayo does

Sam Walton, the founder of Wal-Mart, is legendary for changing the game in retail mainly because he recognized the change before it occurred. Many would say he forced the change to occur. At Mayo Clinic, we would agree that markets are anticipatory and change prior to the actual causal factor (in our scenario healthcare reform). In other words, markets have already begun to align.

As a result, we have completely revamped our approach to one of our most difficult contracting categories – physician preference items. Over the past two years we have rethought and retooled sourcing and contracting processes in this area.

Retooling the physician preference contracting process required creating a methodical approach to ensure the Contract Portfolio Manager (CPM) was thoroughly prepared and fluent in the product category, engaging the involved medical staff at key decision points during the contracting initiative, and providing our suppliers the rules of engagement throughout the entire process. In order to achieve these desired outcomes, it was necessary to map the key steps and associated time lines from contract planning to contract launch. Depending on the complexity of the product category, we determined contracting for physician preference items is a 9-to-12-month process at Mayo Clinic.

Six weeks in advance of launching the contracting initiative, the CPM begins preparing. This is accomplished by collecting, reviewing and assimilating primary and secondary data from many sources, including peer-reviewed literature, face-to-face supplier request for information meetings, physician-specific clinical feedback, and assessment of the success and opportunity for improving the past contracting cycle in the category.

Physicians from Mayo Clinic’s three locations and the Mayo Clinic Health System form a stakeholder team serving as subject matter experts to the CPM. At a minimum, the physician stakeholder team meets in person or by video conference with the CPM four times during the process providing input to critical clinical success factors, bid strategy, bid analysis and final contract award. Based on physician recommendation, product fairs and product evaluations may be conducted at each Mayo Clinic site to ensure products are acceptable in quality and outcome.

Managing the expectations of the supplier community likely has been the greatest change in our process. Mayo Clinic’s negotiating style with suppliers has always been respectful and collaborative; however, in addition we are able to clearly define the timelines for request-for-proposal distribution and return, business offer analytics, negotiations contract award and launch. Instrumental to the process has been instituting a ‘quiet period,’ which is initiated at the distribution of the RFP and lifted shortly after contract award. The Quiet Period reduces supplier counter-detailing, levels the playing field for suppliers and protects physicians from unnecessary discussions on process status.

Surveying outcomes, outlook

Adjusting the physician preference contracting process has resulted in reaching our intended outcomes. The CPM is a business expert confident in delivering an effective contract meeting physician needs and supplier expectations. The physician assuredly has his or her preferences heard, actively participates in product decisions and understands both product quality and cost. Suppliers are informed, receive economies of scale and realize the purchase commitment they negotiated. Most importantly, Mayo Clinic continues to deliver a positive and effective clinical patient experience at an affordable lowest total delivered cost.

The future of PPI category management may be tied to Unique Device Identification. The UDI system is intended to assign a unique identifier to medical devices within the United States. It was signed into law on Sept. 27, 2007, as part of the Food and Drug Administration Amendments Act of 2007. This act includes language related to the establishment of a Unique Device Identification System. Many have speculated that the FDA has a master plan to put in place systems that can predict issues prior to their being reported or even better experienced by patients.

Why is this important? There are really two reasons beyond the issue of safety, which is obvious. If the FDA can reach this level of safety, they may be able to loosen the reins on the current review processes and perhaps significantly reduce the cost, time and backlog associated with bringing a new technology to market. This would be good for everyone, including our patients. The U.S. could quite possibly regain its leadership position in healthcare technology advancements.

The second, we believe, is more aligned with reform and reimbursement. Patient-centered outcomes research needs accurate, relevant and timely information. By joining attributes from provider-based Enterprise Resource Planning (ERP), Billing and Electronic Medical Records (EMR) correlations can be made between devices, outcomes and charges. This is what many believe to be the holy grail of supply chain management. For PPI, that means less preference and more science.

Joseph Dudas serves as vice chair of category management at the Mayo Clinic where he is responsible for all strategic sourcing, contract administration and informatics.

Susan Widhalm serves as physician preference item contracting manager at the Mayo Clinic. This is the third article in a four-part series on category management in healthcare.